Eastern Illinois University The Keep Masters Theses Student Theses & Publications 2017 Structural Change and Productivity Growth in Developing Countries Ahmed Salim Nuhu Eastern Illinois University This research is a product of the graduate program in Economics at Eastern Illinois University. Find out more about the program. Recommended Citation Nuhu, Ahmed Salim, "Structural Change and Productivity Growth in Developing Countries" (2017). Masters Theses. 2700. https://thekeep.eiu.edu/theses/2700 This is brought to you for free and open access by the Student Theses & Publications at The Keep. It has been accepted for inclusion in Masters Theses by an authorized administrator of The Keep. For more information, please contact [email protected]. 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Structural Change and Productivity Growth In Developing Countries (TITLE) BY AHMED SALIM NUHU THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF Master of Arts in Economics IN THE GRADUATE SCHOOL, EASTERN ILLINOIS UNIVERSITY CHARLESTON, ILLINOIS 2017 YEAR I HEREBY RECOMMEND THAT THIS THESIS BE ACCEPTED AS FULFILLING THIS PART OF THE GRADUATE DEGREE CITED ABOVE 5>1s-(17 --1641 THESIS COMMITTEE CHAIR DATE DEPARTMENT/SCHOOL = DATE OR CHAIR'S DES E s-/s-/11 THESIS COMMITTEE M�ER DATE THESIS COMMITTEE MEMBER DATE � THESIS COMMITTEE M� DATE THESIS COMMITTEE MEMBER DATE Structural Change and Productivity Growth in Developing Countries Ahmed Salim Nuhu ahmedsalimnuhu({i\gmail.com Department of Economics Eastern Illinois University May 2017 Thesis Committee: Dr. Mukti P. Upadhyay (Chair) Dr. Linda S. Ghent Dr. Ali R. Moshtagh This paper was submitted in partial fulfillment of the requirements fora Master's Degree in Economics at Eastern Illinois University Copyright© 2017 by Ahmed Salim Nuhu All rights reserved Ab stract The dual-economy model predicts that holding productivity constant, labor reallocation from less to more productive sectors, also known as 'structuralchange ' results in improvement in economy­ wide productivity. The objective of this thesis is to test the empirical predictions of this model using sectoral-level data from twenty-eight developing countries. Using the shift-share growth decomposition approach, we find regional growth-enhancing effects of structural change in Asia, Latin America and North Africa from, 1980 to 2000 and growth-reducing effects in Sub-Saharan Africa over the same period. However, as intersectoral productivity gaps disappeared after 2000, technological progress led the growth process in much of Asia and North Africa, while Sub­ Saharan Africa and Latin America benefited immensely from structural change over the same period. At the country level, however, structural change has been growth-reducing in many countries as labor moved in the wrong direction. We then proceeded to investigate the determinants of the contribution of structural change to the growth process at the country level. Contrary to the literature, we findevidence that rigidity in the labor market enhances the contribution of structural change to growth as it slows the wrong labor reallocation process. Beginning the estimation period with high agricultural employment shares as well as investment are also foundto have significantand positive impact on the structural change contribution to growth. This study provides useful insight into the experiences of developing countries. The lesson learnt is simple; productivity-returns to structural change is not a default outcome of just any labor reallocation process. For countries to benefit from labor reallocation, the market must be conditioned to direct labor from less productive to more productive sectors. Ack nowledg ement This piece of work couldn't have been completed without the help and support of several individuals. Among them is Dr. Mukti P. Upadhyay, my supervisor, to whom I am highly indebted for his support and guidance right from the inception of this project to the end. I am humbled to have been your student. I am also gratefulto Dr. Ali R. Moshtagh, chair of the department and Dr. Linda S. Ghent, both members of my thesis committee, for their guidance and useful comments and feedback. I would also want to express my sincere appreciation to all the faculty at the department of economics at EasternIllinois University, especially to Dr. Ahmed S. Abou-Zaid, Dr. Noel Brodsky and Dr. Jim Bruehler. To you, I will be forever grateful for the opportunity to learn at different times, skills that were crucial in the preparation of this work, during my time at Eastern. Most importantly, I would like to thank my mum for her persistent belief in me and critical decision to invest in my education at a time when she could have given up. Mum, I know you may never be able to read this but I very grateful. Above all, all praise be to Allah; the All-Knowing, the Wise, forendowing me with the knowledge and wisdom needed to write this piece and for his protection and guidance through it all. Table of Contents 1. Introduction ..................................................................................... ......1 2. Literature Review .....................................................................................5 2.1 Structural Change and Productivity Growth ..................................................5 2.2 The Dual-Economy Model. ....................................................................5 2.3 Criticisms of the Model. .......................................................................7 2.4 Other models ....................................................................................8 2.5 Empirical Literature ............................................................................9 3. Data and Methodology ....................................................................... .... 11 3 .1 Data Sources ................................................................................... 11 3.2 Theoretical Framework ....................................................................... 11 3 .3 Computing Productivity ....................................................................... 14 3 .4 Measuring Intersectoral Productivity Gaps ................................................ 16 3.5 Decomposing Productivity Growth ......................................................... 17 3. 6 Decomposing Structural Change ............................................................. 18 3.7 Time-Invariant Weights ....................................................... ................20 3.8 Standard Shift-Share Decomposition ........................................................ 20 3.9 Computing Regional Productivity ........................................................... 21 4. Results and Discussion 4.1 Employment Trends and Productivity Accounting ..........................................22